Cases Enron Aftermath Essay

2306 words - 9 pages

The Enron Bankruptcy
Chapter 11 Reorganization
Todd Haberly
May 8, 2002 BUSA 405
Prof. Macdonald

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On December 2, 2001, Enron Corp. filed the largest bankruptcy in U.S. history. The
Enron bankruptcy is also quickly becoming the most infamous and highly publicized bankruptcy
case in history. Mismanagement, poor business and accounting procedures, and plain greed all
factored into the complicated collapse of Enron. The house of cards, so-to-speak, built by
Enron's top managers came crashing down hard, sending repercussions throughout the business
and financial world.
Led by three important executives, Enron became a fast growing energy trading company
that provided "financial resources, access to physical commodities, and market knowledge." At
its height, Enron was ranked No. 7 by Fortune 500. Chairman Kenneth Lay, CEO Jeffrey
Skilling, and CFO Andrew Fastow propelled the company to the pinnacle of Corporate America,
only to watch helplessly as it plunged into bankruptcy protection. (USA Today; Jan. 28, 2002)
Fastow created a system by which Enron could access capital more easily than its
competitors. By creating special partnerships, or "special purpose entities", Enron could keep
millions of dollars of debt off its books, thereby improving the balance sheet and keeping the
company's credit rating high. In October 2001, the company made a stunning announcement
that it was worth $1.2 billion less than it had previously claimed. Enron stock plummeted from
$90 a share to mere pennies. In December, a proposed merger agreement with Dynegy
collapsed, ending a six-week downward spiral that led to Enron's bankruptcy filing on December
2.
Faced with very few options, Enron chose to file a voluntary Chapter 11 bankruptcy.
Chapter 11 is a section of the federal Bankruptcy Code under which a debtor seeks protection
from creditors while a reorganization plan is developed. A voluntary Chapter 11 filing, such as
Enron's, is an action taken by a U.S. company to resolve financial challenges, such as lack of

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liquidity or excessive debt. It is quite an understatement to say Enron has some financial
challenges to resolve. The company is saddled with more than $15 billion in debt.
Chapter 11 is the section of the Bankruptcy Code that receives all of the notoriety in the
press. It is under this chapter that we have seen and read about giant companies seeking
financial protection under the federal bankruptcy laws. The aim of Chapter 11 is to allow the
ailing company to reorganize itself under court protection. The process is designed to hold a
troubled company's creditors at bay while it hammers out a plan to reduce debt. Creditors often
have little choice but to accept less than what they are owed. "A Chapter 11 bankruptcy can be
a great thing for a cash-starved company being attacked from all sides," said Nancy Rapoport,
Dean of the University of Houston Law Center. (Seattle Times; Nov. 30, 2001)
To understand why Enron filed Chapter 11 bankruptcy, we first need...

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